The auditor set audit risk at 5%, inherent risk at 100%, and control risk at 50%, and
determined a detection risk of 10%. If control risk had been 80%, detection risk would
be about
A) 16%.
B) 10%.
C) 6%.
D) 5%.
Ordinarily, the working papers can be provided to someone else only with the express
permission of the client. This is the case even if the papers are
A) subpoenaed by a court.
B) used as a part of a provincial institute practice inspection.
C) requested as evidence in a provincial institute disciplinary hearing.
D) transferred as a result of a public accountant selling his/her practice to another
public accounting firm.
Flagpole Company Limited recently upgraded its accounting software due to changes in
the payroll income tax rates. Unfortunately, there was an error in the software, and
income tax was calculated incorrectly. The general transaction-related audit objective
affected by these errors is
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Once the auditor has determined the company’s policy for accruing wages and knows it
is consistent with that of previous years, the appropriate audit procedure to test for
cutoff and accuracy is to
A) recalculate the client’s accruals.
B) compare the ledger balance with the journal and the T-4 form.
C) confirm the amount with employees.
D) compare the recorded accrued wages with the amount approved in the minutes of the
Board.
An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This test is performed to satisfy the audit objective of
A) accuracy.
B) completeness.
C) control.
D) existence.
Under the Canadian Auditing Standards, the introductory paragraph of the independent
auditor’s report indicates that the auditor has audited the balance sheet, the income
statement, the cash flow, a summary of accounting policies and notes and
A) the statements of retained earnings.
B) the statement of changes in equity.
C) management’s discussion and analysis letter.
D) the internal controls of the company.
Which one of the following controls would be of concern to management, but not to the
auditor? Controls over the
A) collection of accounts receivable amounts.
B) entry of payroll wage rates into the computer systems.
C) distribution of promotional information to present and potential clients.
D) cost of inventory items as recorded in the perpetual inventory system.
A statistical method used to estimate the proportion of items in a population containing
a characteristic of interest is
A) population-proportional-to-size sampling.
B) attribute sampling.
C) variables sampling.
D) estimation sampling.
An example of an audit failure is that the
A) auditor issues an erroneous audit opinion as the result of a failure to comply with the
requirements of GAAS.
B) audit opinion is qualified.
C) company files for bankruptcy less than 12 months after receiving an unqualified
opinion.
D) auditor issues an erroneous audit opinion as the result of an undiscovered fraud that
took place in the period being audited.
Sampling risk (sampling error) is an inherent part of sampling that results from
A) inappropriate audit procedures.
B) failure to recognize exceptions.
C) testing less than the entire population.
D) weaknesses in the client’s internal control system.
The existence of advanced automated systems affects the audit process. Which of the
following characteristics is an indicator of the presence of an advanced automated
information system?
A) electronic data interchange systems for purchase orders, sales invoices and payments
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically-controlled equipment used in the manufacturing process
When a higher than normal ratio of long-term debt to net worth is coupled with a lower
than average ratio of profits to total assets, the company
A) is highly successful.
B) is comparable with industry standards.
C) has a high risk of financial failure.
D) has a liquidity problem.
Notes payable which have been repaid in full should be
A) destroyed so that they will not be paid again inadvertently.
B) cancelled and destroyed.
C) cancelled and returned to the creditor.
D) cancelled and retained by an authorized company official.
Which of the following ultimately determines the specific audit procedures necessary to
provide an auditor with a reasonable basis for the expression of an opinion?
A) the audit program
B) the auditor’s professional judgment
C) generally accepted auditing standards
D) the auditor’s working papers
Canadian GAAS (including the CICA Handbook) are the authoritative standards for the
conduct of financial statement audits in Canada. How would this affect the audit of a
Canadian company that is owned by a Swedish company that must also report using
Swedish (International) auditing standards?
Independence is assessed in the eyes of external users and regulators. Which of the
following is a tool that helps the auditor identify whether the auditor is independent for
a particular audit engagement?
A) completion of independence forms at time of employment
B) the use of an independence threat analysis
C) audit risk model assessment for each engagement
D) professional skepticism when assessing control risks
When inherent risk is assessed as higher (i.e. more material errors are likely to exist)
and control risk is assessed the same from one year to the next, what is the likely effect
on detection risk? Detection risk will
A) increase.
B) decrease.
C) stay the same.
D) need less documentation.
Frankinfurter Limited decided that it wanted to improve earnings. To do this, it
understated its expenses by omitting unpaid expenses from the accrued liabilities
account at year end. Which management assertion has been violated?
A) existence
B) disclosure
C) rights and obligations
D) completeness
The most common method used for performing statistical tests of controls is
A) variables sampling.
B) attribute sampling.
C) judgment sampling.
D) random selection of samples.
When auditing the human resources and payroll cycle, the auditor should verify the
officers’ compensation because
A) officers are more likely to commit fraud.
B) officers’ compensation is likely more prone to error.
C) some officers may have complex compensation packages.
D) some officers may be in a position to pay themselves more than the authorized
amounts.
During the audit of the fixed asset section, the auditor decided to inspect source
documents supporting all fixed asset additions exceeding $3,000. This type of audit
procedure is called a
A) census of the strata over $3,000
B) analytical review
C) attribute sample
D) monetary unit sample
Herbert Zora is having financial statements prepared by his PA to accompany his tax
return. His primary concern is cost. Of the following, the lowest cost engagement that
the PA can perform for Zora’s financial statements is
A) compilation.
B) review.
C) audit.
D) WebTrust.
When considering the relationships between types of audit tests and evidence, which of
the following procedures is used only for tests of details of balances?
A) inspection
B) recalculation
C) reperformance
D) external confirmation
ZyCo has recently converted to a new online accounts payable system. To test that only
authorized vendors have been converted to the vendor master file (occurrence), the
auditor would
A) conduct cut-off tests, for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online)
system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system
to the new (online) system.
D) conduct tests of programs, to verify that programs in the new systems are
functioning as designed.
Which of the following is an example of a key internal control for an online system that
would help ensure that recorded sales are for the amount of goods shipped and are
accurately billed and recorded?
A) Shipping documents are matched to invoices.
B) Shipping details are automatically used as the invoicing source.
C) Shipping documents are prenumbered and accounted for.
D) Transactions are summarized daily for posting to the general ledger.
For each of the following independent situations, state whether the PA would be
considered to have a fiduciary duty. Justify your response.
A) Juan is conducting a review engagement for the fifth year for Mini Market
Greenwood Limited.
B) Lisa is working as a temporary controller at Middle Manufacturing Co. while the
controller recovers from surgery.
C) Mark is managing the assets of a ten year old buy whose parents were killed in a car
accident. Mark has signing authority on cheques and makes investment decisions.
To facilitate the working paper preparation process, defaults can be established to
automatically insert client name, period covered, and preparer. This can best be done
using
A) the junior staff assigned to the engagement.
B) an old-fashioned rubber stamp on each printed page.
C) cut and paste from word processing or spreadsheet software.
D) automated working paper software.
PA is conducting the audit of Middi Furniture Company, a medium-sized company with
few effective controls and significant inherent risks. Management has decided that it is
not cost-effective to implement better internal controls. What audit strategy will PA
likely select for this client?
A) combined audit approach for all transaction cycles and accounts
B) substantive audit approach for all transaction cycles and accounts
C) combined audit approach for all cycles except cash and inventory
D) substantive audit approach for all cycles except sales and payroll
Richard is performing a compilation engagement. Richard is concerned that the
information is
A) arithmetically correct.
B) accurate.
C) complete.
D) in accordance with ASPE.
In order to assess if a company is a going concern, the auditor can calculate which of
the following ratios during the audit planning and compare with previous years and
successful companies in the industry?
A) debt to equity ratio
B) accounts receivable turnover ratio
C) percent of interest expense to sales
D) inventory turnover ratio
Xiao, PA, is the audior of Minkle Credit Union, a medium-sized credit union. Xiao has
prepared a management letter with several serious control weaknesses. Management
agrees with the facts, but does not want to present the letter with the weaknesses to the
audit committee or the board of directors. Management has implied that they will
request a change of auditors if your firm presents the management letter to the board.
Required: Discuss the actions that Xiao should take. Justify your response.
One of the lessons learnt from accounting scandals such as Enron is that generally
accepted accounting principles (now under an acceptable financial reporting
framework) cannot be relied upon exclusively in deciding whether financial statements
are fairly presented. Why is this the case?
The auditor’s decisions regarding evidence accumulation can be broken into five
subdecisions. One decision relates to determining the nature of the audit procedure to
be used to collect the evidence; i.e., “which audit procedures to use.” Identify and
discuss the remaining four audit evidence decisions that the auditor makes.
We discuss four types of auditors: public accountants, government auditors, Canada
Revenue Agency auditors and internal auditors. Briefly describe the work and
responsibilities of each type.
The generally accepted auditing standards can be divided into three categories of
standards. List the three categories and provide an example of each.
What is the purpose of developing a client risk profile? List the steps involved in
developing a client risk profile.
Yvan is preparing the audit plan for Share the Wealth, a non-profit organization. Share
the Wealth is a large Montreal based organization and receives corporate donations and
also has many stores that collect and re-sell costume jewelry and clothing. The purpose
of the organization is to build recreation areas for children in less fortunate areas of the
city.
Share the Wealth was started by two sisters. One of the sisters is still actively involved
in the organization, but the other sister has been devoting less time to the organization
since she has had triplets.
Share the Wealth has a total of 8 stores in the city where individuals can drop off
donations and where customers can also purchase the second hand clothing and
costume jewelry. Share the Wealth has a total of 12 employees who work in the
different stores across the city. Depending on the schedule and availability, the
employees will randomly be assigned to a store for the week.
Required:
Provide three procedures that Yvan should consider when performing the review
engagement of Share the Wealth?
Describe the three types of tests that need to be performed by the auditor when auditing
a client’s data conversion process.
You are the audit senior responsible for a large photofinishing centre and camera store.
The store uses automated cash registers tied to inventory (also known as point of sale
devices). The point of sale devices take advantage of automated procedures and
controls that can be programmed, to reduce errors and improve controls over
completeness of transactions.
Required:
Provide examples of interdependent controls that should be used to complement the
programmed controls.
Raul, PA, received a call from his friend Cristobal Franco. He needed an audit urgently,
because the bank might call his loan for his computer store CF Ltd. Since Cristobal had
been his high school friend and they still played soccer together every two weeks, Raul
agreed. Raul and Cristobal had a quick meeting, where Raul fixed the audit fee at
$10,000. Cristobal stressed the importance of an unqualified opinion for the bank.
Raul sent two available junior staff to CF’s offices. The junior staff were experienced in
review engagements, and had been working for Raul for about six months. The two
staff had a quick look around the store, noting the documents strewn everywhere. The
accounting staff came in and chatted briefly after their smoke break. They were about a
month behind on recording transactions, because Cristobal had laid off one sales
person. The accounting staff also helped out with providing sales quotes and Cristobal
did all of the technical work.
At the end of the day, the junior staff were each given a $250 gift certificate to be used
in the computer store. This was great, because CF also sold MP3 players and supplies
such as CDs and DVDs.
At dinner that night, the junior staff told their family that it would probably be a great
idea to hold off on any computer supplies or equipment purchases that they needed,
since CF would likely hold a sale in the next month or two to improve cash flow.
Required:
Identify and discuss the violations in the rules of conduct with respect to CF.
Two types of services provided by public accounting firms are audits and reviews.
Discuss the similarities and differences between these two types of services. Which type
provides the most assurance?
State five specific balance-related audit objectives for accounts payable and, for each
objective, describe one common test of details of balances.
You have been assigned the in-charge-auditor for a new client, Beltair House. Beltair
House is a non-profit charitable organization which operates a home for unwed mothers
who have decided that they would like to keep their child. In the past, the organization
had been almost fully funded by the provincial government. However, due to recent
budget cut-backs, Beltair has to raise operating funds from public donations.
Because of financial constraints, there is now only one full time manager, Joan Ng. Joan
has the help of several volunteers, and the residents help out with the chores and with
maintenance and cleaning. Ng has been able to arrange for a local food bank to provide
a large portion of the food required for meals. Door-to-door canvassers have been able
to raise money to keep the House going, but Ng is concerned that this will change.
Required:
Identify issues that you will need to consider that affect the risk of this audit
engagement.
Your client, Huge Telephone Company (HTC), has encountered troubled times, due to
deregulation. There is competition for local telephone business and long distance
telephone business. The high speed lines for internet access provided via the telephone
network have not been selling as well as expected. A new quirk is that many large cities
are going to provide free wireless services by installing wireless transmitters on
telephone poles, and is only offering to pay a pittance for the use of the telephone poles.
HTC has been able to retain reasonable profits by cutting staff to a bare minimum and
outsourcing many services.
However, due to several labour contracts and federal legislation that will increase
services, you have doubts about the ability of the company to renew a major bond issue
this coming year.
Required:
How does the above information affect the audit report?
Bratlett Company has purchased all of the shares of another company, but does not
want to consolidate its financial statements. Management has drafted a rather long and
confusing note to the financial statements that describes the transaction that took place
briefly, and states that debt has been acquired in a foreign currency. In your view, the
transaction, its effect on the company and the accounts have not properly been
disclosed.
Required:
List the audit objectives about presentation and disclosure that have been affected and
explain how they are affected.
As part of a loan agreement that it is thinking of obtaining, Always Quick
Manufacturing Limited has decided that it will use accounts receivable and inventory as
security for working capital funds.
The bank has indicated that in addition to an annual financial statement audit, that it
would require quarterly assurance on the accounts receivable and inventory amounts.
The type of assurance required has not been stated.
The bank has told Jose, the owner of the company, that he would need to provide a
detailed inventory list and an aged accounts receivable trial balance on the fifteenth of
each month for the information as at the preceding month end. Jose would like to know
what his alternatives are.
Required:
Your partner is going to meet with Jose next week, and would like you to prepare a
memo to file that will be used as part of the meeting. The memo should include a list of
alternative types of engagements that could be used to provide assurance on the
accounts receivable and inventory balances.